By Jonathan Stempel
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The Financial Industry Regulatory Authority said violations by the Swiss bank's UBS Securities LLC broker-dealer unit caused the orders to be mismarked or filled without reasonable grounds to believe the underlying securities could be located.
In short sales, investors sell securities they do not own, hoping the prices will fall so they can repurchase the securities later at a lower price and replenish their lenders. Regulators fear that abuses can distort markets, and accelerate declines in share prices.
FINRA said UBS' violations lasted from 2005 to 2010, and that the bank likely processed "tens of millions" of short sale orders for equities and exchange-traded funds improperly.
Many problems were not detected until FINRA's probe caused UBS to review its systems, the brokerage regulator said.
"Broad, systemic failures is the best way to describe it," said Brad Bennett, FINRA's chief of enforcement, in an interview. "The fine reflects the gaps in the system that we found. We didn't identify any specific delivery failures, but that could means the bank just got lucky."
UBS spokesman Christiaan Brakman said the bank was pleased to settle, and has made a "substantial investment" to improve its systems and oversight. It did not admit wrongdoing in agreeing to settle, and also accepted a censure. FINRA said the fine was reduced to reflect UBS' "substantial assistance."
"NAKED" SHORT-SALE ABUSES FEARED
FINRA said UBS violated Regulation SHO, a rule imposed in 2005 by the U.S. Securities and Exchange Commission to thwart abusive "naked" short selling, and ensure that brokerages can deliver shares on short-sale transactions they process.
Naked short sales occur when investors sell short without first borrowing the underlying shares or making sure they can be borrowed.
While the practice is not always illegal in the United States, the SEC has taken steps to limit abuses, including during the 2008 financial crisis when it restricted short sales of some financial stocks.
The SEC in July 2009 adopted a rule requiring that "fails to deliver" in all equity securities be promptly closed out.
"If there were failures to deliver, short selling would have the ability to affect the market, especially in hard-to-borrow, thinly-traded stocks," Bennett said.
In the last two years, FINRA fined Deutsche Bank AG $575,000, Milwaukee-based Robert W. Baird & Co $900,000 and Boston-based National Financial Services Inc $350,000 for Regulation SHO violations over their handling of short-sale orders. None admitted wrongdoing.
FINRA is an independent regulator that oversees nearly 4,500 brokerages.
(Reporting by Jonathan Stempel in New York; editing by Gerald E. McCormick and Tim Dobbyn)